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Taco Bell's improbable comeback

By Leslie Patton, (c) 2013, Bloomberg News

Posted:
03/15/2013 07:53:08 PM EDT

Just two years ago, Yum Brands' Taco Bell chain was warding off claims its beef wasn't real. Now the taco seller is Yum's fastest-growing brand in the U.S., which includes behemoths KFC and Pizza Hut. (Fred Prouser)

Tacos are trumping chicken and pizza at Yum Brands.

Just two years ago, the Louisville, Ky.-based company's Taco Bell chain was warding off claims its beef wasn't real. Now the taco seller is Yum's fastest-growing brand in the United States. Meanwhile, sister chain KFC is closing stores, and Pizza Hut is locked in a price war with Domino's Pizza and Papa John's to sell pies as low as $7.99.

Taco Bell's secret sauce? New upscale menu items and premium pricing to go with it. Taco Bell is appealing to young men and women with ranch- and nacho cheese- flavored taco shells and a Chipotle-esque menu of citrus-herb marinated chicken and cilantro rice. Sales at U.S. Taco Bell stores open at least a year jumped 5 percent in the three months ended Dec. 29, topping KFC and Pizza Hut, as well as fourth- quarter same-store sales at McDonald's.

"We haven't seen this kind of a surge of same-store sales at Taco Bell in some time," Bryan Elliott, an Atlanta-based analyst at Raymond James Financial, said in an interview. "What's working is more upscale pricing."

The home of the 89-cent nachos will this year introduce its most expensive single item yet: fajitas for $5.49. Taco Bell has been justifying the pricier fare with a series of TV commercials starring celebrity chef Lorena Garcia, who created the chain's Cantina Bell menu. As Garcia says in the ads: People "won't even believe it's Taco Bell."

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Taco Bell's rebound comes as challenges in China weigh on the parent's shares. Yum is struggling to win back consumers in its biggest overseas market after a former supplier's chicken was found to contain high levels of antibiotics. In November, Yum was trading at a 64 percent premium to the Standard ; Poor's 500 Index on a price-to-earnings basis, according to data compiled by Bloomberg. Now it's trading at a 37 percent premium.

Taco Bell and its "Think Outside the Bun" slogan flourished in the mid-2000s until the downturn hurt sales. While same-store sales rose 2 percent in 2010, they dropped 2 percent the next year after an Alabama law firm filed a class-action lawsuit claiming the chain was using beef that didn't contain enough real meat. While the suit was dropped, Taco Bell was forced to mount a national marketing campaign to make sure Americans knew its taco meat was 88 percent real beef, along with secret seasonings.

Taco Bell sales began to pick up last year after its Doritos Locos Tacos mashup generated buzz even among food critics. The chain has sold about 375 million of the hard -shell beef tacos, or more than one for every person in the U.S. This year, Taco Bell is expanding its Cantina Bell line from just burritos and bowls to include double-steak quesadillas for $4.99 and fajitas for $5.49, Taco Bell's Chief Executive Officer Greg Creed said in an interview.

"Cantina Bell was a great addition" to Taco Bell, Creed said. "Cantina makes us more relevant."

While it has about 1,000 fewer stores than in 2000, Taco Bell is now poised for expansion. In December Creed told an investor conference that there is room for the chain to open another 2,000 restaurants in the U.S. in the next 10 years. There were 5,695 U.S. Taco Bell stores at the end of last year, of which 18 percent were owned by Yum.

Taco Bell, long a favorite among the late-night party crowd, is also trying to attract customers in the morning. Last year, it began selling breakfast foods in about 820 locations in the western U.S., a strategy that pits the chain directly against McDonald's, which dominates the morning fast-food rush.

The breakout product is the so-called A.M. Crunchwrap: scrambled eggs, bacon or sausage, cheese and hash browns wrapped in a flour tortilla for $2.49, Creed said. The chain, which is also hawking Cinnabon-branded doughnut bites to its morning patrons, is planning to introduce breakfast nationwide in 2014, Creed said.